Global X MSCI China Real Estate ETF
Q3 2005 Earnings Call Transcript

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  • Operator:
    Good afternoon. My name is Michael and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Chiron Third Quarter 2005 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. OPERATOR INSTRUCTIONS. Thank you. I would now like to turn the call over to Ms. Mardi Dier. Ms. Dier, you may begin.
  • Mardi Dier:
    Thank you, Michael, and good afternoon and welcome to Chiron's Third Quarter 2005 Conference Call. I'm Mardi Dier from Investor Relations. On behalf of the Chiron team, I'd like to introduce to you our principal speakers on today's call. Howard Pien, Chiron's CEO, and David Smith, Chiron's CFO. And joining us for today’s Q&A today are Rino Rappuoli, our Chiron's Chief Scientific Officer; Craig Wheeler, President of Chiron Bio Pharmaceuticals, Gene Walther, President of Chiron Blood Testing; Dan Soland, President of Chiron Vaccines; and Stephen Dilly, Senior Vice President of Bio Pharmaceuticals development; and Jack Goldstein, our Chief Operating Officer. Before we begin, let me remind you that some of our remarks today will include forward-looking statements relating to future events and the performance of the Company. These forward-looking statements include statements regarding product initiatives, clinical trials and future manufacturing capacity. These statements involve risks and uncertainties and actual results may differ materially from those expressed or implied herein. We refer you to the documents that the Company has filed with the SEC, including our 2004 10-K, our second-quarter 10-Q and our upcoming 10-Q for the third quarter, as well as our third quarter earnings release that we issued earlier today, for a discussion of factors that could cause the Company's actual performance to differ from those expressed or implied in today's remarks. Important factors include, among others, the actual outcome of clinical trials and regulatory reviews. We do not undertake an obligation to update the forward-looking information we are providing today. Please note that we present our financial results on both and as-reported GAAP and an adjusted basis. A reconciliation of the adjusted numbers discussed today to GAAP is attached to the third quarter earnings release. With that, I'll turn the call over to Howard.
  • Howard Pien:
    Thank you, Mardi. Good afternoon and welcome. Today, I'll discuss our drivers for growth, starting with the opportunities ahead of us in Vaccines and then in Blood Testing and BioPharma. David will then follow in our usual format with a more detailed discussion of the financial results for the quarter. And afterwards, we will be happy to answer any of your questions. We have a stellar cast of people here, and we'll be very happy to entertain any questions you have. The past several weeks have been momentous for Chiron, with multiple milestones achieved which highlight the strengthening prospect of the Company. And with tremendous resolve, we announced a week ago that we have returned to the U.S. flu vaccines market and are able to renew our service to the public health needs. Moreover, our technology in vaccines places Chiron well as a potential major contributor to the ongoing efforts to prepare for a possible flu pandemic. While it has been a strenuous and arduous year to achieve the remediation of Liverpool, we have continued to progress and mature our milestones across our businesses. And in the coming months, we expect to attain several more achievements, most notably the interim look at the trial for Tifacogin in severe community-acquired pneumonia. So let me start with the discussions on Vaccines. We saw a notable achievement this week with our flu cell culture vaccine. I'm very pleased to say that we received the go-ahead from the FDA to initiate clinical testing of the cell culture flu vaccine in the U.S. and begin enrollment, which we did yesterday, in our Phase I/II trial. We were very pleased to tell you last week about the return of FLUVIRIN to the U.S. market, as this achievement required and unprecedented mobilization and involved extensive input and interactions with two major regulatory agencies. And we fulfilled our pledge to once again to be a participant in a critical public health need and help ensure an adequate vaccine supply for the '05/'06 flu season, and more importantly, beyond. By the end of this week, we expect to have shipped 5 million doses of FLUVIRIN, 3.4 million of which have been released by the FDA CBER as of yesterday. We continue to believe that we can provide a meaningful supply of FLUVIRIN for the season, although it will be below the 18 million doses. Production and lot release are still ongoing, and because we don't have enough experience with all the processes and procedures that we have installed, we do not yet have a tight range of FLUVIRIN doses forecast. As we said last week, the production season has been truncated by the amount of time that we devoted to the remediation effort in Liverpool than we had previously thought. And the output was lower due to adaptation to new processes and procedures implemented in the remediation process. It is the price we paid in order to maximize our confidence that this return to the U.S. supply will be sustainable. We are in contact with government agencies on regular and frequent intervals to keep them briefed on our supply status with the aim of minimizing any concern arising from lack of a firm updated dose projection. We understand the importance of being able to provide an update on our FLUVIRIN production numbers and accordingly on our 2005 EPS guidance, and we will endeavor to do so for you and everybody else who is interested as quickly as we can. While returning to the market this year is an unparalleled achievement for Chiron and a clear sign of our belief in the importance and the value of the influenza vaccine market, our sights are already on 2006. With a full season of manufacturing, we project that we will have the capacity for approximately 40 million doses next year, as we expect to have a full production season in 2006 and all of the changes and procedures and processes will have firmly taken hold. As you know, any production figures depends upon three major factors, which are yield, throughput and the length of the production season. We have multi year contracts with all seven of our distributors and already has strong commitments for the majority of this projected capacity for the next season. At the same time, we see numerous indications that pricing will remain firm beyond this flu season. Let's review these favorable underlying trends. The CDC is striving to get 150 million people maybe 180 million people vaccinated annually by around 2010, and as supply solidifies, we'll be more aggressive in marching towards this goal. Many cost benefit studies have demonstrated that flu vaccine is one of the most cost effective interventions, preventing both direct medical costs and productivity losses, and the recognition of these studies has been a factor in the increase in the value of flu vaccine over the last few years. Increasing recognition exists now that the interpandemic vaccination could be the key component of pandemic preparedness in the long run. And finally, a strong reimbursement policy with the CMS administration fees increase from about $8 to about $18 per vaccination this year will provide additional incentive on the up tick in demand. FLUVIRIN remains an important driver of our Company, but it is just one part of a larger picture. Chiron is positioned to be at the nexus of pandemic preparedness. Chiron initiated clinical testing of a prototype avian flu vaccine after the initial outbreak of H5N1 in Hong Kong in 1997, and our scientists have published avian flu vaccine studies in key journals. And then, MF59, our proprietary adjuvant used in a product called FLUAD, which is approved in Europe for use in the elderly, could enhance the strength and broaden the response of an avian flu vaccine, therefore reducing the required antigen dose and possibly providing cross protection against drifted strains of H5N1 avian flu virus. Our current capacity to produce monovalent H5N1 could contribute significantly to stockpiles for a number of countries. We're in discussions on this issue with several governments, including our own, and expect to participate in upcoming tenders. Beyond current stockpiling efforts for pandemics, we are also advancing our flu cell culture vaccine program, which is the next generation for flu vaccine. Cell culture-based production offers greater manufacturing flexibility and does not depend on eggs. Chiron has a very strong position in development of a flu cell culture vaccine. In addition to the initiation of Phase I/II study in the U.S., we have made excellent progress with our Phase III study in Europe of a flu cell culture vaccine, which may be fileable for approval in 2006. Now let me now turn to Blood Testing. Blood Testing continues with the successful pursuit of three important growth strategies, which are new assays, automation and geographic expansion. As you know, our collaborator, Gen-Probe, announced within the past month or so that in reviewing the 510k application for ULTRIO on the TIGRIS system, the FDA has determined that ULTRIO running on TIGRIS was not substantially equivalent to ULTRIO running on the semi-automated eSAS system. While this is a disappointment, our collaborator, Gen-Probe, is working rapidly to clarify the FDA's questions so as to be able to address them, and we are hopeful that ULTRIO on TIGRIS will be approved in 2006. Gen-Probe was also informed that it would receive additional questions from the FDA regarding the BLA application for ULTRIO, which is a customary part of the approval process. We continue to expect ULTRIO approval in the U.S. in the first half of 2006. Based on the responses from customers in Europe, we believe that the outlook of both ULTRIO and TIGRIS will be bright. We have already achieved our corporate goals for the year 2005 of 50% conversion to ULTRIO in Europe and the placement of TIGRIS in our key European Union blood centers. Currently, we have 33 TIGRIS instruments placed worldwide. 13 of those are in the U.S. under the West Nile Virus IND. We believe that these accomplishments underscore the value of the products and suggest a similar path of success in the U.S. once they are approved. Now let me turn to BioPharma. The past month has been a good month for BioPharma. At the beginning of the month, we announced with our partner Nektar that we had begun the first of two pivotal trials for TIP, or Tobramycin Inhalation Powder, in cystic fibrosis patients. The trial, called ASPIRE I, will evaluate the efficacy and safety of TIP in the treatment of pseudomonas Aeruginosa lung infections. A second trial is planned for the next year. The speed and convenience of TIP therapy could be an important advance in treating common lung infections associated with cystic fibrosis. Two weeks ago, Chiron and its partner XOMA announced the initiation of a Phase I clinical trial for Chiron 12.12 for our anti-CD-40 monoclonal antibody in patients with multiple Myeloma. This is the second Phase I trial for Chiron 12.12. A trial in patients with chronic Lymphocytic Leukemia was initiated in April. And the expansion of the Phase I program underscores our excitement for the compound, as well as the value of our Translational-Medicine approach of discovery, which has helped us identify disease against which Chiron 12.12 may be effective. Chiron 258, along with 12.12, represent a renewed, focused and reinvigorated oncology portfolio at Chiron. 258 is a broad-spectrum kinase inhibitor differentiated by targeting a wider set of Angiogenic Kinases, including VEGF and PDGF and FGF receptors, than the first generation compounds. The breadth of kinase inhibition is significant. It's highlighted in the October journal Cancer Cell. The article shows the importance of inhibition of the FGF pathway, which mediates so-called tumor escape from pure VEGF antagonists in the animal model. In addition, we have moved forward with Chiron 265, which we believe to be a very promising compound. 265 is an oral RAF antagonist, and it is on track for submission this year. We believe it is the first potent selective RAF antagonist, and together with Chiron 12.12 and 258, made ours one of the most promising oncology pipelines in the entire industry. We have another growth opportunity ahead of us in our BioPharma` business in the short run, which is CUBICIN, or daptomycin for injection, which we license from Cubist for the European Union for complicated skin and soft-tissue infections. We're awaiting a positive European and regulatory opinion on CUBICIN and are planning for launch of the product in the European markets early part of next year. Enrollment is on track for our Phase III study of Tifacogin for severe community-acquired pneumonia. The Data Monitoring Committee will undertake an interim evaluation for safety and futility before the end of this year. The data will remain blinded to us at Chiron, but we can infer from a positive decision, if that's the decision that is reached, to continue at the interim analysis stage that there is a lessened risk of safety issues and that there is an increased confidence in the statistical power to project efficacy for the entirety of this study, and that is a study we hope to complete patient enrollment by the end of 2006. As you can see, as we have been mobilizing to achieve the Liverpool remediation over the last 12 months, we have continued to foster the opportunities for growth in the future of Chiron across all of our businesses. We look forward to updating you on the progress that we continue to make in the weeks and the months to come. So let me now turn over to David for a detailed discussion on financial results.
  • David Smith:
    Thanks, Howard. I'll begin with a review of the results for the quarter, which were released earlier today. All earnings per share amounts that I'll be discussing today refer to the adjusted diluted per share earnings unless otherwise noted. As we've discussed previously, we present our results on both an as reported GAAP basis and an adjusted basis. The adjustments we made this quarter to arrive at adjusted earnings consist of the amortization expense on acquired identifiable intangible assets related to acquisitions and the impairment loss on acquired intangibles related to a yellow fever vaccine. The adjustments we made in the third quarter of 2004 to arrive at adjusted earnings consist of the amortization expense on acquired identifiable intangible assets related to acquisitions and the purchased in-process research and development related to the acquisitions. A reconciliation between our GAAP and adjusted results can be found on our website in the Investor section under Financial Reports. For the third quarter of 2005, of Chiron reported adjusted income from continuing operations of $73 million or $0.38 per share. Chiron's adjusted earnings as restated were $0.27 in Q3 2004. Three factors had a material impact on the quarterly comparison of financial results and best explain the significant fluctuations when comparing this year to last year for the third quarter. As we reported a year ago following the suspension of our license in the Liverpool facility, our entire FLUVIRIN product was reserved for in the third quarter of 2004, resulting in a $91 million charge to the cost-of-sales line. Also in the third quarter of 2004, Chiron recognized $46 million of royalty and license fee revenue resulting from a settlement with Roche related to a U.S. patent directed to NAT methods for HIV, from here I will refer to this as the Roche settlement, as compared to 8 million recognized in the third quarter of 2005. Lastly, there were no sales of BEGRIVAC influenza vaccine in the third quarter of 2005, compared to $41 million of sales in the third quarter of 2004. Total revenues in the third quarter of 2005 decreased 9% to $480 million from $530 million for the same period in 2004. Product sales decreased 2% to $367 million from $376 million. The decrease in revenues is primarily a result of no BEGRIVAC sales in the third quarter and the Roche settlement I just described, partially offset by increases in sales and other influenza vaccines and increases in sales of rabies vaccines, PROCLEIX, Menjugate, TOBI and Betaseron. Royalty and license fee revenues were down due to the Q3 2004 Roche settlement. Revenues from the joint business arrangement with Ortho, collaborative agreement revenues and other revenues were consistent with prior year. Gross margins increased to 54% from last year's gross margins of 36%. As I noted, our entire FLUVIRIN product was written off in the third quarter of 2004. For the current quarter, the loss of BEGRIVAC had a negative impact on our gross margins. Research and development expenses for the third quarter of 2005 totaled $107 million, up 4% from the third quarter of 2004. The increase is primarily related to the development efforts in our oncology franchise and our Meningococcal franchise. This increase was partially offset by research and development programs that have been completed or discontinued prior to the third quarter of 2005. SG&A expenses for the third quarter of 2005 totaled $117 million, up 5% from the third quarter of 2004. The increase in SG&A reflects a broad range of activities, significant among them the prelaunch program for CUBICIN, higher employee-related costs and corporate governance. Now I'd like to move onto a review of the business unit financial results, starting with our Blood Testing unit. Blood Testing total revenues, including product sales, Chiron's share of the revenues from our joint business arrangement with Ortho, collaborative agreement revenues and royalty and license fees, decreased to $138 million in the third quarter of 2005 from $141 million in the year ago period, a 2% decrease. This decrease was primarily due to the Roche settlement in the third quarter of 2004, partially offset by higher product sales of PROCLEIX over a year ago, as well as increased revenues associated with increased profitability from our joint business arrangement with Ortho. Driving the PROCLEIX growth was the continued penetration into several markets abroad and the introduction of our ULTRIO assay and TIGRIS system outside of the United States and increased donations in the United States. Royalty and license fees in Q3 2004 reflected the Roche settlement, as well as our settlement with the Blood Transfusion Centers of the German Red Cross, partially offset by an increase in Roche royalties in the third quarter of 2005 due to payment of a higher rate because certain countries entered the EU and because of an increase in reported donations. Turning now to Vaccines, for the third quarter of 2005, total product sales for the Vaccines business were $153 million, versus $173 million in the same period last year. We saw a decrease in the sales of flu vaccines due to BEGRIVAC, partially offset by increases in the sale of the travel vaccines, the Meningococcal vaccines, and pediatric and other vaccines. Sales of our flu vaccines were $60 million in the third quarter, down 35% from the year ago period. The loss of sales of our BEGRIVAC product drove the decrease and was partially offset by increases in sales of other influenza vaccines during the third quarter. There were no sales of FLUVIRIN in the current quarter. Sales of our travel vaccines were $35 million in the third quarter, up 32% from the year ago period. Our rabies vaccine drove the increase. There was increased demand for our rabies vaccines in the U.S., primarily due to a product recall from a competitor, as well as a price increase. In addition, there was an increase in tender sales for rabies vaccine in Europe. Our third quarter Meningococcal vaccine sales were $12 million, up 31% from the year-ago period. The increase was primarily driven by tender sales to Spain. Sales of pediatric and other vaccines were $46 million in the third quarter of 2005, up 3% from the year ago period. The increase was driven largely by increased sales of our DTP vaccine to GSK, partially offset by a decline in sales of our polio vaccines. Gross profit for vaccines increased to 45% from last year's gross margins of 9%. As I noted, our entire FLUVIRIN product was written off last year in the third quarter. The loss of the BEGRIVAC sales this quarter had a negative impact on the vaccines gross margins this quarter. FLUVIRIN related remediation costs continue to impact vaccines gross margins, but are winding down as we near the completion of our comprehensive remediation effort of our Liverpool facility. This quarter, we incurred approximately $3 million in remediation costs, as compared to none in the third quarter last year. Moving to our third business, BioPharmaceuticals, total BioPharmaceuticals product revenues were $137 million in the third quarter of 2005, up from $132 million over the year ago quarter, a 4% increase. We saw increases in TOBI and Betaseron sales, while Proleukin sales declined. Our third-quarter TOBI sales were $58 million, up 4% from the year-ago period, primarily due to price increases and increased patient demand in both the United States and Europe, partially offset by wholesaler ordering patterns. Third quarter sales of Betaseron were $37 million, up 5% from the year ago period, primarily due to price increases, increased in-house production and timing of clinical product shipments, partially offset by a reduction in shipments to Berlex and inventory ordering patterns. Third quarter sales of Proleukin were $31 million, down 2% from the year-ago period, primarily due to decreased patient demand in the United States and Europe and wholesaler ordering patterns, partially offset by price increases. Gross margins in the biopharmaceuticals segment increased to 71% from last year's gross margins of 67%. This increase was primarily a result of favorable product mix and increased utilization of facilities over the prior year. Let me take a minute to summarize our view of the quarter. We believe the quarter represents a true turning point for the Company. We've returned to the U.S. market with FLUVIRIN, clearing the many regulatory hurdles we've faced. We're proud of this achievement and see this as a critical step to furthering our leadership position in influenza, which includes our work on pandemic preparedness and the advances in our flu cell culture development program. While we complete manufacturing and strive towards determining the number of doses we can provide this season, our sights are already set on 2006, and we're confident of the role we will play in meeting this important health need. At the same time, we continue to advance our pipeline and progress on our commercial goals in the BioPharma and Blood Testing groups, highlighting the bright prospects for growth and value creation that we will see ahead for the Company. At this point, I will turn the call back over to Mardi for Q&A.
  • Mardi Dier:
    Thanks, David. That concludes our prepared remarks, and now I would like to open up the call for questions. I would like to remind you to please limit yourself to one question per caller. And with that, we'll take the first question.

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